Risk Preferences, Perceptions and Systematic Biases

Many decisions we face are characterized by risk or uncertainty we must make choices prior to knowing the outcome. However, we often know the potential outcomes and even have some idea regarding the likelihood of each. While there are similarities in how people respond to risky decisions, there are also differences related to factors like gender (e.g. Levin et al., 1998) and culture (e.g., Kleinhesselink and Rossa, 1991; Weber et al., 1998). Understanding these similarities and differences can help our understanding of a range of economic phenomena. For example, why does entrepreneurship flourish in some countries while it stagnates in others? Risk perceptions and risk preferences are widely recognized by economist as the major factors influencing risky behavior. Risk perceptions characterize the likelihood of chance outcomes and are usually framed in terms of subjective probabilities. Risk preferences rank outcomes based on individual wants. An understanding of how to use public policy to positively influence risky behavior requires understanding to what extent differences in risky behavior are attributable to differences in risk perceptions versus differences in risk preferences. The purpose of this project is to develop a novel experimental protocol for measuring individual differences in risk perceptions and risk preferences. This experimental protocol will then be used to explore how individual differences in subjective probabilities and risk preferences relate to objective probabilities, demographic characteristics, wealth, and information.The experimental protocol consists of three tasks. Firstly, subjects will read a general interest news article. Secondly, subjects will be asked to complete a survey. The survey will ask general demographic questions (e.g. age, gender, and family background). It will also ask 20 questions designed to elicit cultural information based on Geert Hofstede (2001). Thirdly, subjects will be asked how much they are willing to pay to play a more favorable lottery. The question will be repeated with 30 different lottery combinations, which will vary in terms of how a favorable outcome is determined (e.g. drawing poker chips as illustrated in the example or randomly choosing of specific word from the general interest news article) and the scale of rewards.